Saudi Oil Production Capacity Increasing: Official

The Saudis will increase oil production capacity gradually over the next year according to a senior advisor to the Minister of Petroleum.

Oil Pump

At the Jeddah Energy Meeting in Saudi Arabia Saturday, Ibrahim Al-Muhanna told CNBC's Melissa Francis that production would increase significantly "by the middle of next year."

The kingdom's current total capacity of 11.3 million barrels per day is expected to increase to 12.5 million barrels per day, Al-Muhanna said. Previous estimates by the International Energy Agency put current Saudi capacity at about 10.8 million barrels per day. The kingdom currently produces about 9.5 million barrels per day.

"This rise allows them to raise current output, while at the same time maintain a cushion of spare capacity," said CNBC contributor John Kilduff, Senior Vice President Of Energy at MF Global Ltd. "There was a concern in the market that any output rise would leave us with no room for error in terms of any other outages. This should relieve some of those concerns."

The Gulf nation has also become increasingly concerned that record oil prices could hinder growth in the U.S. and other major industrialized economies, potentially leading to a decline in oil demand and a sharp drop-off in prices.

While Saudi Arabia has been reluctant to drastically increase production, it has announced several small increases recently that it says were made to satisfy increased customer demand. The country has consistently said that it will produce enough oil to ensure the market is supplied.

The kingdom increased oil production by 300,000 barrels a day in May, and is expected to add another 200,000 barrels a day in July. The kingdom has also signaled it would not go beyond $50 billion plan to increase capacity to 12.5 million barrels a day.

Saudi assistant oil minister, Prince Abdulaziz bin Salman, told a news conference Saturday that the delegates were "congregating to achieve results" and try to draw "a collective way forward for how to attend to this situation."

"This situation as we see it today as it exists needs everybody's attention simply because it no longer is a luxury to talk about it or ... to keep bouncing back and forth blame," he added.

The prince said that Saudi Arabia has been working with several international organizations to put together a background paper to focus Sunday's discussions and reiterated that the kingdom was ready to meet demand from its customers and foster stable prices.

He said it would be "wrong" to judge the success of the meeting by oil prices the day after it ends.

His comments on the eve of the energy summit Jeddah set the stage for a showdown between the U.S. and conference host Saudi Arabia, which has largely blamed speculation in the oil markets for record prices.

The U.S. and many other Western nations have put increasing pressure on Saudi Arabia, the world's top oil exporter, to increase production. Saudi officials have been hesitant to do so, arguing that soaring prices have not been caused by a shortage of supply.

Bodman disputed that assertion Saturday, saying oil production has not kept pace with growing demand, especially from developing countries like China and India.

"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.

He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil.

Many countries around the world have experienced social unrest by populations angry that rising fuel prices have driven significant increases in the cost of food and other basic goods.

Rising demand in the developing world has coincided with historically low levels of spare oil production capacity, which fell below two million barrels per day among OPEC countries in May for the first time since the third quarter of 2006, according to the International Energy Agency.

Bodman made clear that the responsibility for reducing oil prices did not simply fall on the shoulders of producing nations, saying consuming countries must increase energy efficiency and invest in the development of alternative fuels. But he saved his strongest words for oil producers like Saudi Arabia, who he said must step up long-term investment in production and spare capacity.

"The incentive (for investing) is simply reasonable prices so that we're not faced with having to drop everything and race to Jeddah for a meeting that was called on a week's notice," said Bodman.

On Friday, Light, sweet crude for July delivery rose $2.69 to settle at $134.62 a barrel on the New York Mercantile Exchange, recovering some of the $4.75 that the contract lost Thursday after China announced it was raising fuel prices. London Brent was also up.

Crude prices ended the week largely unchanged, falling only 24 cents from last Friday's close despite reaching a new trading record of $139.89 on Monday.

The July crude oil contract expired at the end of trading. Trading was much heavier in the August crude contract, which rose $2.76 to settle at $135.36 a barrel.

The Associated Press contributed to this report.

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